Especially in the wake of the COVID-19 pandemic, debt is a very normal part of the American experience. Medical bills, student loans, mortgages, and credit card debt are just a few examples of the liabilities that are preventing Americans from maintaining financial security—and peace of mind.
If you are struggling with unmanageable debt, you might be considering bankruptcy. But how exactly could bankruptcy help you?
Let’s take a look at a few different types of debt and how the bankruptcy court will treat them.
When debt is unsecured, the creditor or lender does not have a legal claim to any of your property.
Here are a few examples of unsecured debts:
- Medical bills
- Credit card debt
- “Payday” loans
- Unpaid rent or utility bills
Bankruptcy courts routinely discharge the above debts when people file Chapter 7 or Chapter 13. When your debt is discharged, you are no longer legally obligated to pay, and debt collectors can no longer attempt to collect it from you.
When debt is secured, the creditor or lender does have a legal claim to your property. This claim is called a lien, and the creditor or lender is considered a lienholder.
Examples of secured debts include:
- Mortgages. When you take out a mortgage, you give the lender the contractual right to seize your home if you stop making payments. This seizure is called foreclosure. Once you pay off the loan, the lender no longer has a claim to your house.
- Automobile loans. Like mortgages, automobile loan agreements allow the lender to repossess (i.e., seize) your vehicle if you default.
Sometimes, unsecured debts will become secured. If you don’t pay your taxes, for example, the IRS can attach a lien to your property. The IRS can then force the sale of your property and collect the value of the lien (unless you pay what you owe). Creditors that aren’t the IRS (e.g., a credit card company) can also place a lien on your property, but they have to file a lawsuit and win a judgment against you first.
So, what happens with secured debt when you file bankruptcy? The court can technically discharge your liability for secured debts, but the discharge does not automatically remove the lien. In other words, you might no longer be obligated to pay the debt, but the lienholder can still take your property after the bankruptcy process is over. This is why people who are hoping to avoid foreclosure or repossession tend to file Chapter 13 bankruptcy, which gives them 3-5 years to make regular payments and cure their default—rather than discharge the debt and lose the property.
In limited cases, bankruptcy can strip the lien off of your property and discharge the debt. However, this involves a more complicated procedure, and some debts will not qualify.
Student loans are technically a type of unsecured debt, but bankruptcy courts do not discharge them as easily as credit card debt, medical debt, and other unsecured debts. In fact, you will need to file an adversary proceeding if you want to try and discharge your student loan debt.
An adversary proceeding is a separate lawsuit within the bankruptcy. When you file an adversary proceeding to discharge student loan debt, you will need to prove that repaying your student loans would cause you to experience “undue hardship,” which is a standard that is quite difficult to meet. There are signs, however, that times are changing.
If you were recently divorced, you may be either entitled to or responsible for child support, spousal support, or another divorce settlement. Unpaid child support and spousal support are two examples of debts that the bankruptcy court cannot discharge. Settlements, however, may be discharged under Chapter 13. Learn more on our blog about divorce and bankruptcy.
Bring Your Questions to the Law Offices of Jeffrey S. Graff
Bankruptcy is a complicated process, but it provides invaluable relief for countless debtors throughout the United States. I, Jeffrey S. Graff, have decades of experience helping clients navigate the bankruptcy process, and I look forward to bringing this experience to your case. If you have questions or concerns about this debt-relief procedure, such as how it may affect your family or whether it can help you start fresh, please don’t hesitate to get in touch with my firm.